Thursday, September 19, 2013

Stock market participation in decline

Despite the major indices at new all-time
highs, the rate of participation among American investors has been
declining. Consider that TD Ameritrade’s
Investor Movement Index (IMX) has made a series of lower highs and lower lows
since peaking at the beginning of March.
During the last 6 ½ months since investor participation peaked according
to IMX, the S&P 500 Index (SPX) has gone on to make a series of higher
highs. It’s extremely rare that such an
extended period of stock market gains coincide with declining participation. Normally new highs in the major averages
bring in a flood of new money from investors hungry to get in on the
action.

According to the latest data
from the Investment Company Institute (ICI), equity market inflows continue to
be pretty much non-existent much as they have been in recent months. The following graph shows total inflows to be
hovering barely above the “zero” level.
If ever there was a picture which captures the complete lack of interest
in stocks among the public, this is it.

The principles of contrarianism tell us that
stock market tops are unlikely to occur when public interest in stocks is at
low ebb. Instead, major tops normally
occur when the public becomes highly interested in stocks and has a big stake
in the equity market. That certainly was
the case leading up to the major tops of the last three decades.

It’s possible that the broad market rally
after the Fed announced it would continue QE3 will kindle a revival of interest
among retail investors. If so, we can expect
to see increased money flows into equities and, in the not-too-distant-future,
the corresponding market top that usually accompanies such widespread
enthusiasm.